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Aerospace & Defense

Japan's F-35 buildup snubs domestic jet engine builder IHI

US-made fighters leave no room for major Tokyo defense contractor

Japan is purchasing 105 F-35 stealth fighters from the U.S. (Courtesy of the Japan Air Self-Defense Force)

TOKYO -- As Japan buys more U.S.-made F-35 stealth fighter aircraft, domestic jet engine builder IHI faces a risk to its most lucrative business.

Prime Minister Shinzo Abe's government has budgeted 701.3 billion yen ($6.41 billion) in fiscal 2019 for purchases through the U.S. foreign military sales program, up 70% from the previous year. Much of the outlay will go toward 105 Lockheed Martin F-35s, a transaction highlighted by President Donald Trump during his recent visit to Japan.

"This purchase would give Japan the largest fleet of F-35s of any of our allies," Trump said Tuesday aboard the Kaga, a Japanese Maritime Self-Defense Force ship.

But Japanese defense industry executives likely will take little comfort from that achievement, or from Tokyo's rising purchases of U.S. military hardware. While some defense procurement deals come with licensed production in Japan, the foreign military sales program lets Washington set the terms, leaving no opening for Japanese contractors.

IHI's aerospace and defense segment generated 492.2 billion yen, or about 30%, of the heavy industry group's sales during the fiscal year ended in March and 46.4 billion yen, or roughly 60%, of its operating profit.

Defense-related deals accounted for about 100 billion yen of the segment's sales. But industry watchers say IHI's defense business could shrink by about 10% in a few years, owing mainly to Tokyo's U.S. purchases.

The impact at the engineering level raises a deeper concern. To the aerospace industry, fighter jets are what Formula One racing is to automakers: a showcase for the most powerful technology.

As the creator of Japan's first jet engine, IHI controls a near monopoly on making aircraft engines for the Ministry of Defense, from the design to the production stages. The company applies its cutting-edge defense technology to engines for the civilian sector.

IHI's handling of all aspects of fighter engines commissioned by the Defense Ministry "lends the credibility needed for joint international development of civilian engines," said Tomoharu Shikina, who heads the aerospace and defense segment.

IHI employees work on the XF9-1 prototype engine slated for use in an upcoming Japanese fighter jet.

Trouble with IHI's defense business poses a risk to this relationship, and to a pillar of the company's earnings.

One key to filling that hole is the successor to the F-2 fighter jet, which is supposed to provide the core of Japan's air defenses starting in the 2030s. Last June, IHI delivered to the Defense Ministry the XF9-1 prototype engine, which could be installed in future aircraft.

The XF9 is said to perform on par with the latest jet engines employed by the U.S. and Russian air forces. Whether Japanese or American defense contractors take the lead in the F-2 development remains an open question.

IHI's shares are trading about 30% below the year-to-date high recorded in January. In March, the company admitted to numerous cases of faulty inspections of aircraft engines, and it has submitted an improvement report to the transport ministry.

IHI's net profit nearly quintupled last year. "The market environment surrounding IHI is improving," said Shinji Kuroda, an analyst at Credit Suisse Securities (Japan).

But if Trump wins re-election in 2020, pressure on Japan to buy more U.S.-made jets may only grow.

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